# Payout Ratio

## What it is:

The payout ratio, or dividend payout ratio, is the percentage of a company's earnings paid out to investors as cash dividends.

## How it works (Example):

At the end of a specified period, companies will sometimes pay out dividends for every share owned. Theoretically, the money for these dividends comes from the company's earnings from that period. Thus, the payout ratio is calculated as the percentage of earnings paid out as dividends.

The formula for calculating the payout ratio is:

Payout ratio = (dividends paid/net earnings for the period) x 100

For example, if Company XYZ earned \$1.00 per share in the fourth quarter and paid a dividend of \$0.60 per share, its payout ratio would equal 60%.

## Why it Matters:

A company's payout ratio can reveal many things. A low ratio may indicate the company is using much of its earnings to reinvest in the company in order to grow further. Conversely, a high payout ratio can indicate a willingness to share more of the company's earnings with investors. Large, slow-growth companies such as telecoms or utilities offer typically offer high payout ratios.

Investors should be wary of payout ratios over 100%, as this means the company is paying out more than it is earning -- an unsustainable condition. There are some instances, however, where payout ratios over 100% simply indicate a company has high depreciation costs -- which are a non-cash charge that impact net earnings, but not cash available to pay investors.

Related Terms View All
• Though most of the trading is done via computer, auction markets can also be operated via...
• Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
• Savings bonds are bonds issued by the U.S. government at face values ranging from \$50 to...
• The basic idea behind break-even point is to calculate the point at which revenues begin...
• If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...